Associate company
Encyclopedia
An associate company in accounting and business valuation
is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary
, with its financial statements being consolidated into the parent's books. Associate value is reported in the balance sheet
as an asset, the investor's proportional share of the associate's income is reported in the income statement and dividend
s from the ownership decrease the value on the balance sheet. In Europe, investments into associate companies are called fixed financial assets.
Associate value in the enterprise value
equation is the reciprocate of minority interest
.
One should note that investment in associate companies should be accounted for using the equity method
, under which the dividends are treated as a return of capital thus are not recognized in the investor's income statement as equity income.
Business valuation
Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business...
is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
, with its financial statements being consolidated into the parent's books. Associate value is reported in the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
as an asset, the investor's proportional share of the associate's income is reported in the income statement and dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s from the ownership decrease the value on the balance sheet. In Europe, investments into associate companies are called fixed financial assets.
Associate value in the enterprise value
Enterprise value
Enterprise value , Total enterprise value , or Firm value is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others...
equation is the reciprocate of minority interest
Minority interest
Minority interest in business is an accounting concept that refers to the portion of a subsidiary corporation's stock that is not owned by the parent corporation...
.
See also
- Equity methodEquity methodEquity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies. The investor keeps such equities as an asset. The investor's proportional share of the associate company's net income increases the investment , and proportional payment of dividends...
- Consolidation (business)Consolidation (business)Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group...
One should note that investment in associate companies should be accounted for using the equity method
Equity method
Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies. The investor keeps such equities as an asset. The investor's proportional share of the associate company's net income increases the investment , and proportional payment of dividends...
, under which the dividends are treated as a return of capital thus are not recognized in the investor's income statement as equity income.